German wage growth finally taking off

The latest data on German wage growth suggest that pay is finally beginning to respond to the long labour market recovery. 

With deflation offering a further boost to real wage growth, we expect the German consumer recovery to gain pace this year. Labour costs data released today showed that the annual rate of German hourly pay growth slowed slightly from 2.3% in Q3 to 2.0% in Q4. But recent falls in inflation pushed real pay growth up. 

The introduction of a national minimum wage from the start of this year may also serve to push wage growth up a bit further. This could imply that the long-awaited German consumer recovery is about to materialise.

Real wage growth is already much stronger than it has been for much of the past decade. And with inflation falling into negative territory in Q1, real pay should rise more rapidly. 

Capital Economics notes as follows on Wednesday:

• We are not calling the kind of German consumer boom that could cause a dramatic pick-up in exports elsewhere in the euro-zone. 
  
  
• And since German exporters have scope to respond to any rise in wage growth by cutting their margins, peripheral economies are unlikely to steal much market share. 
  
  
• But partly thanks to the rise in real wage growth, we have revised up our forecast for German GDP growth this year from 1.0% to 1.5% and we expect a similar expansion in 2016.